Loan modifications under HAMP can be strategically difficult. Under some circumstances, the law does not clearly define the income that a homeowner must disclose. For example, should a single mother disclose child support payments as income in a HAMP application? At what point using the NPV test will a failure to disclose child support income result in the loan modification being denied because the borrower's income is too low? At what point will disclosing the income result in the borrower's monthly payment being $300 a month higher for the next 40 years? Obviously the difference is important.

Whether a person qualifies for a HAMP modification turns on a calculation called "Net Present Value," which is an estimate of the probability of redefault. Unfortunately, it is a secret formula that is ridiculously complicated and turns on very specific expectations of future home price appreciation in every single neighborhood in the United States. This is the same government whose best economists were certain that (1) there was no national housing bubble, (2) the subprime crisis was absolutely not going to cause any problems in the broader economy, and (3) that U-3 unemployment in the United States would peak at 8 percent if the "stimulus package" was enacted. This same US Treasury is now predicting down to two decimal points the precise home price appreciation expected in every single city and neighborhood in the United States. Your loan modification may be granted or denied based on these highly speculative calculations.

If the NPV with a loan modification is higher than the NPV if the bank forecloses, then the borrower qualifies for a HAMP modification.

Market value is the single most important factor in the NPV test. Most lenders use Automated Valuation Model (AVM) to determine market value. Many real estate agents perform a "Broker Price Opinion" (BPO) for about $50. We can assume that real estate agents performing $50 BPOs are likely not the most successful real estate agents. Home owners can request a Comparative Market Analysis (CMA) from most real estate agents. A CMA is prepared by a real estate agent based on comparative sales in the same neighborhood. Because many real estate agents have noticed somewhat reduced sales volume, it is generally easy to get two or three CMAs for free just for phoning a real estate agent and explaining you're considering selling your house and you'd like one.

Servicer Errors in the NPV Calculation

Many bank employees performing the NPV calculation have little or no experience. Several law firms have reported bank employees denying HAMP modifications only to speak with them to learn that they believed the borrower's monthly income was her annual income, or that her annual income was her monthly income. Lawyers report bank employees using Zillow, or some other online service to determine market value and being perfectly happy to accept some other valuation.

Second Mortgages

HAMP may allow for second mortgages to be modified to a rate of 1 or 2% for the first five years, and then rising to the same rate as the first mortgage for the remaining amortization period. In Chapter 7, 11, and 13, a debtor may strip away second mortgages and other secured debts where the value of the first mortgage exceeds the value of the home. This process is called "lien stripping" and the theory behind it is that at the time of the bankruptcy proceeding, the liens are effectively unsecured. The ability of the borrower to lien strip is a powerful bargaining tool to pressure junior mortgage lien holders to accept short pay-offs.

Lenders who understand their position on second liens should settle for 10% of the total loan balance. If the homeowner owes $50,000 on a second mortgage, the borrower may be able to negotiate a short pay-off of $5,000 and the lender should be satisifed

HAMP and Bankruptcy

Under the HAMP amendments, once a borrower is in a trial payment plan, if the borrower files a Chapter 13 bankruptcy petition, the servicer is barred from objecting to the plan or seeking relief from stay. It is possible that once a trial modification is in bankruptcy, the bankruptcy makes the trial permanent. Supplemental Treasury Directive 10-02, this rule does not apply to Fannie and Freddie owned mortgages, which is, unfortunately, about half of all US mortgages.

Pooling and Servicing Agreements Have Loss Mitigation Provisions

Borrowers should review the pooling and servicing agreement for the mortgage backed securities trust holding their mortgage. The reason for this is that many PSAs contain "loss mitigation provisions" which are instructions and directives on what sorts of actions the trustee should take to mitigate losses due to delinquency and default. Sometimes these modification terms are more generous than those available through HAMP. This means that a borrower who turns to HAMP instead of the mitigation provisions provided in the PSA may end up permanently with a higher cost loan than was possible.

Using the HAMP NPV Calculation in Foreclosure Defense and Bankruptcy

If the NPV test shows that the lender will make more money by modifying the loan than by foreclosing, this should raise a judge's suspicion of why a lender would press to foreclose. A possible reason for this is that the servicer may not be negotiating in good faith because the servicer stands to gain more in fees and charges from the foreclosure process than it would gain from modification.

We represent some clients who have compelling cases and little money at no charge. Sean received the Benito Juarez human rights award in 2008 and the ALRP Volunteer Award in 2012 for taking more than 10 pro bono cases in 12 months. We need volunteers. E-mail Debbie to volunteer.

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